Broadstone Hardware: The February Cash Squeeze
Broadstone Hardware is an independent DIY and builders’ merchant in Galway with annual turnover of €1.2 million. It is now early February. The cash balance is €18,000, and the bank overdraft limit is €50,000, of which €42,000 is already drawn. Sales are seasonal: December and January were weak, and the spring garden and building season does not begin until late March. A large builder customer owes €85,000, now 75 days overdue; its finance director has promised €40,000 in three weeks but has missed two previous promises. VAT of €36,000 falls due in five weeks. Payroll is €28,000 per month and rent is €8,000 per month. The owner is considering four responses: use more overdraft to take a 2% early-payment discount from suppliers; delay the VAT payment; factor the builder receivable (85% advance, 2.5% fee); or cancel €30,000 of spring stock orders. The bank has asked for a cash-flow forecast before increasing facilities.
1. Prepare a six-week cash-flow outline using reasonable assumptions, and identify the size and timing of the peak funding gap. Show your reasoning.
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Start with available liquidity: €18,000 cash plus €8,000 undrawn overdraft = €26,000. Over six weeks, committed outflows are roughly two payrolls (€56,000), two rents (€16,000) and VAT (€36,000), totalling €108,000 before supplier payments. If the builder pays €40,000 in week 3, liquidity becomes €66,000, leaving a €42,000 gap before suppliers. The gap peaks in week 5 when VAT falls due. Factoring the €85,000 receivable gives an 85% advance of €72,250, less a 2.5% fee of €2,125, so about €70,125 arrives immediately - roughly €30,000 more than the promised builder payment, but the factor will collect the debt and the business loses control of the customer relationship. Delaying VAT removes the week-5 peak but does not solve the underlying position. The key judgement is that the gap is timing-related, not necessarily a loss-making problem, so the forecast should separate overdue debtor cash from seasonal trading cash and show the bank a realistic week-by-week worst case.
2. Evaluate factoring the receivable against using extra overdraft to take the 2% supplier discount. Recommend one option, with conditions.
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Factoring is fast and does not depend on the bank approving a higher limit. It converts a doubtful €85,000 debt into about €70,125 now, which covers the VAT and payroll peak. Its cost is the €2,125 fee plus possible damage to the builder relationship and the risk that the factor pursues the customer aggressively. Using overdraft to take a 2% discount looks attractive: on €100,000 of supplier payments the saving is €2,000. But the overdraft has only €8,000 headroom, and the bank is already nervous. Paying 50 days early for a 2% discount is an expensive way to borrow if overdraft interest and fees exceed the saving, and it uses cash that is needed for VAT. Recommendation: factor the overdue receivable, but only with recourse and after checking the contract, and use the cash first for VAT and payroll, not for extra stock. Ask the bank to convert part of the overdraft to a short-term loan and set a condition that no further credit sales are made to the builder until the account is cleared.
3. Discuss the legal and ethical implications of delaying the VAT payment and the risks to the business.
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VAT is collected on behalf of the State and is not the company’s money. Delaying payment can trigger interest and penalties, damage the business’s tax clearance status, and in serious cases lead to prosecution or被迫 closure. It may also breach the bank’s lending covenants if the overdraft agreement requires tax compliance. Ethically, using VAT receipts as working capital shifts the cost onto public services and other taxpayers, and it can mislead suppliers and the bank about the company’s true liquidity. A better route is to contact Revenue before the due date and seek a phased payment arrangement, showing the cash-flow forecast and the overdue debtor problem. That is transparent, preserves the business’s compliance record, and is more likely to be accepted than simply not paying. The owner should also disclose the overdue debtor to the bank and take legal advice on recovering the €85,000 rather than relying on repeated promises.